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Japan Fallout?

Fountain Valley-based memory products maker Kingston Technology Co. is coming off a banner sales year in 2010. But Japan’s earthquake and tsunami clouds the outlook for this year.

That’s based on possible damage to memory chip makers in Japan, where the March 11 earthquake is expected to derail production.

“Something as minor as a power disruption, seismic activity or any other problem with the manufacturing line can absolutely destroy any wafers that are in process,” said a person familiar with the chip industry and Kingston’s business model.

Damage to Japan’s chip factories still is being sussed out.

The island nation accounts for nearly a fifth of the world’s chip production, according to El Segundo-based iSuppli Corp., part of Colorado’s IHS Inc.

“Japan puts a blanket over the picture,” the source said. “You cannot speak to any semiconductor or module producer right now and get an honest answer. It would be impossible to say what the outlook is.”

The bulk of Kingston’s sales come from buying memory chips from suppliers in Asia and Europe and assembling them onto modules and into cards for computers.

It also makes flash memory products, including thumb drives and storage cards for cameras, cell phones and computers.

A disruption to Japanese memory chip suppliers stands to drive up the price of memory chips.

That’s a double-edge sword for Kingston.

It sees more revenue when chip prices rise—up to a point. The company can’t pass along all of the increased costs of chips to computer makers, corporate buyers, consumers and other customers.

Profits inevitably get squeezed.

A spokesperson for Kingston declined to comment for this story.

Kingston has ties to Japan’s top chipmaker, Elpida Memory Inc., which seems to have fared pretty well in the quake’s aftermath.

Last year, the company invested some $200 million in Elpida. It’s not an unusual move for Kingston, which has made strategic investments in a handful of other Asian memory chipmakers through the years.

Elpida’s Hiroshima plant, in Japan’s southwestern region, was spared damage, the company said in a statement.

The company’s Akita unit in northern Japan, closer to where the quake and tsunami hit, halted operation due to a lack of power.

But “there was no damage to the manufacturing equipment,” the company said.

Supply Chain Worries

Power outages could end up having the biggest impact on supplies.

Silicon wafers, which are etched in a many-layered manufacturing process to form memory chips, are sensitive to any kind of change.

Wafers that are “half baked” often have to be tossed out, shrinking supplies worldwide.

Other big makers of memory chips, including South Korea’s Samsung Group and Taiwan’s Powerchip Technology Corp., have taken conservative stances in light of a potential shortage.

Spot Market Disruption

Top chipmakers have stopped offering up their chips for sale on the spot market and are sticking to fulfilling existing contracts “for fear of a wafer supply shortage,” according to a Bloomberg News report.

It’s unclear what this means for Kingston, the biggest maker of memory products for computers and consumer electronics.

The company is among the biggest buyers of what’s called dynamic random access memory, the most common type of memory chips used in computers and servers.

“If the supply chain is interrupted in a way where chip manufacturers cannot obtain DRAM chips, the potential for shortages and supply tightening is real,” the unnamed source said. “We know at least a few of the wafer-makers are impacted.”

The bout of uncertainty comes on the heels of a stellar 2010 for Kingston, in which it reported revenue of $6.5 billion, up from $4.1 billion in 2009.

The jump reflects a boost in demand and rising memory chip prices that had doubled off 2009’s recessionary lows.

Privately held Kingston has some 800 workers here. It doesn’t disclose profits.

“Kingston saw a rise in average selling prices for most of its product lines in 2010, particularly during the first quarter,” the company said. “Demand was also healthy from both corporate end customers and consumers.”

Biggest Private Company

The sales record makes Kingston the largest private company in Orange County based on revenue.

Kingston leapfrogged Newport Beach’s Pacific Life Insurance Co., which reported $5.6 billion in 2010 revenue.

The third-largest private company here is Irvine’s Golden State Foods Corp., which saw $4.6 billion in 2010 sales.

2010 was a high watermark for Kingston. It’s second-highest yearly sales record was in 2007, when it recorded $4.5 billion in sales.

Kingston first reached the $1 billion mark in 1995. It doubled to $2 billion by 2004 and reached $3 billion in sales in 2005.

A bright spot for Kingston this year is a continued rebound in demand as companies replace aging computers and build out data centers.

Stamford, Conn.-based market researcher Gartner Inc. in January boosted its technology spending forecast for the year to $3.6 trillion, up 5% from 2010.

Gartner’s previous outlook called for tech spending growth of 3.5% for this year.

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